The other day I was reading articles on a certain excellent blog. The title of one was, “Determining your home’s value in 10 easy steps.” Yep. It’s that easy. The blogger wrote appraisers are not necessary to investors. Just pick a few comps and pull it all together. Yep. It’s that easy.

So I posted the following example of why it’s not that easy.

Concessions will generally fall into two categories: sales concessions and financing concessions. Sales concessions would be the inclusion of personal property, settlement assistance or seller contributions and cash incentives. Financing concessions are special or creative financing and seller discount points or buy-down programs.

You MUST adjust for these concessions to calculate the true sale price!

Example From APB Valuation Advisory Opinion #2:

You look at a “Comparable Sale” and see the sale price is $103,000.

Sale price was $103,000 with a seller-financed note of $95,000 at 6.0% on a 10- year balloon and 30-year amortization. Market terms at the time the contract was written were 6.5% for 30 years.

Calculate Monthly Payment of Seller Financing = $ 569.57 (6.0% /30 Year Amt/$ 95,000 Loan)

Calculate Present Value of $569.57 per month for 10 years at Market Rate of 6.5% = $50,161.18

Calculate Remaining Mortgage Balance of Loan in 10 years (6% Rate) of which Equals $ 79,501.44

Calculate Present Value of the Mortgage Balance ($ 79,501.44) at 6.5% Equals $41,576.26

Sum the Present Value of Monthly Payments and Present Value of Mortgage Balance = $91,737.44

Add the Down Payment of $8,000 ($103,000 – $95,000) to Sum of Present Values = $8,000

Result is the Sale Price adjusted for Seller Financing = $99,737.44

Given the sale price of $103,000 and “market equivalent” price of $99,737.44, the impact of the favorable financing on this sale appears to be $3,262.56.

Therefore, $99,700 (rounded) would represent the cash equivalent price.

So no. The ‘Comp” did not actually sell for $103,000 did it? It actually sold for $3,400 less.

This is just the FIRST Adjustment to ONE comparable appraisers make in the sequence of adjustments. We haven’t even considered view, GLA, BR, BA, location, condition, etc.

Oh, then you find out the seller also contributed $2,500 towards buyer’s closing costs. Now the cash equivalent price is $94,900. Oh, the seller contributed $2,000 towards repairs. And a golf cart. Now the cash equivalent price is $90,000. Oh wait. A financing concession. The buyer had 2 points paid on his behalf. Now the cash equivalent price is $88,000.

So no. The $103,000 sale price isn’t the true sale price is it? Yep. Easy. Just find a few sales and pull it all together.

Sellers and investors:

When your realtor throws you three comps and a cloud of dust, or a CMA, BPO or a report touting price per sq. ft. or unreliable “averages”, ask s/he:

“Was there a seller concession in any of the sales? How about financing concessions?” Ask her/him to explain what they are and the impact of them on a sale.

Little more to it than taking 10 minutes to throw an auto-generated “market analysis” together isn’t it?

Call Mims. We are the ABCs of Real Estate: Appraisers, Asset Management, Brokerage, Bankers, and Consulting.

BLT: Attitude Adjustment by Hank Williams Jr.

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